Spain’s Emerging Banking Crisis

Spain was hit hard by the financial crisis. Like the U.S. and the UK, Spain experienced high capital inflows and rapidly rising housing prices in the years leading up to the crisis. And like the U.S. and the UK it is now stuck with a struggling banking sector and bloated public finances.

The Spanish government, in grappling with its debt, narrowly passed a $15-billion austerity package in May. Tomorrow it faces the next big legislative challenge in a move towards more fiscal responsibility: a labor reform bill that is as tenuous as any other major reform. The proposed legislation, scheduled for voting Tuesday, includes “measures to cut the cost of firing, one of the highest in the developed world, simplify contracts and promote youth employment.”

But even if the labor reforms go through, the nation is still on the edge. Spanish banks have found it increasingly hard to get funding in international capital markets, thus turning to the European Central Bank (ECB) to meet their short-term needs for liquidity. Spanish banks borrowed around â’¬85 billion from the ECB last month, which, according to the Financial Times, “provides further evidence of the acute tensions in the Spanish banking system.”

Eurozone member nations have pledged $750 billion to ensure no European country fails while taking the continent down with it. The Spanish government is sure to be privileged to this fund, though because Spanish banks aren’t as integrated into the eurozone system they might not have as easy a time finding a bailouter. The best hope for Spanish banks to avoid collapse will be for them to be seen as integral to the Spanish economy. According to Marcio Annunziata: “since a banking crisis would weigh on public finances, this in turn increases the perceived risk of Spanish government bonds, driving their prices down.”